UAL-Continental Merger Triggers Multimillion-Dollar Exec Bonuses

Continental Airlines’ move to Chicago could create windfalls in Houston and Chicago, depending on which executives lose a game of musical chairs in the shuffle that will follow the merger with United Airlines.

A new management team will be selected by Jeffery Smisek, Continental’s CEO, who will be CEO of the combined airline, and United CEO Glenn Tilton, who becomes chairman.

Executives who find themselves out of a job, or who choose not to make the move from Houston, will be entitled to lucrative payouts under their contracts.

For Continental, chief marketing officer James Compton would receive a payout worth $9.3 million, according to formulas found in the company’s proxy statement. Operations chief Mark Moran would receive a package worth $9.2 million. Finance chief Zane Rowe’s would be worth $8.4 million. The payouts include “gross-ups” of more than $2 million each to cover tax payments related to their severance packages.

“The payments to the Continental executives are consistent with what we see elsewhere,” said Derrick Neuhauser, chair of BDO Seidman’s compensation practice in Chicago. “Their contracts are built to protect them in a change in control.”

The payouts will be richer on the Continental side because its merger is a change in control. Any move of the headquarters more than 50 miles from Houston allows executives to resign “for good reason,” which adds to their payouts.

Because United is the surviving company based in Chicago, it won’t experience a change in control except when performance bonuses already granted to executives vest, according to regulatory filings.

Since Tilton will remain chairman of the new company, he forfeits a $4.6 million severance payment guaranteed under his contract, but he will receive the same amount in restricted shares. He also waived accelerated vesting of $4.6 million in stock options and $9.9 million in restricted stock. He’ll get a prorated amount of his potential performance bonus valued at $1.7 million.

In connection with the merger, United’s top executives signed retention agreements that guarantee them 2.75 times their salaries and target bonuses if they lose their jobs within two years of the merger. The severance packages are richer than the ones previously in place.

They would also receive immediate vesting of long-term incentives such as stock options. United executives are sitting on huge potential gains from stock options granted last year at $4.86 per share, during the depths of the recession.

United shares closed Wednesday, May 5, at $19.78.

For United, the potential payouts, including the gross profit from option awards, include:

• $8.9 million for John Tague, United Airlines president.

• $5.7 million for Kathryn Mikells, CFO.

• $4.3 million for Pete McDonald, chief administrative officer.

• $2.9 million for Graham Atkinson, president of the frequent-flier unit.

Severance payments are a major cost of mergers, and they cut into the benefits of a deal.

The payments in the $3.2 billion merger of United and Continental could be far greater than the figures in the securities filings.

“You only see the top five executives in the proxy disclosure,” Neuhauser says. “You don’t know how many other executives have change-in-control agreements. Those may be the people who are less likely to move [from Houston].”